Something in the Air: How pollution shapes fund managers' climate decisions

Prof Thanh Huynh, 2026

Purpose

Climate change presents one of the most significant sustainability challenges facing business and society. Institutional investors play an increasingly important role in directing capital towards sustainable activities, yet little is known about the behavioural factors that influence their climate-related investment decisions. This research sought to improve understanding of how environmental conditions shape financial decision making, with the goal of supporting more informed, transparent and responsible investment practices.

Practice

Thanh Huynh and colleagues conducted a large-scale empirical study using data on more than 2.4 million mutual fund-stock-quarter observations covering U.S. equity mutual funds between 2005 and 2018. The study combined financial market data with environmental data from the U.S. Environmental Protection Agency and firm-level carbon emissions from S&P Trucost. The research investigates whether exposure to local air pollution influences fund managers' decisions to invest in or divest from carbon-intensive firms, and whether corporate carbon disclosures moderate these effects, while also examining differences between experienced and less experienced fund managers and evaluating the financial consequences of these investment decisions.

Output

The study reports robust evidence that temporary exposure to poor local air quality leads fund managers to reduce their holdings of high-emission companies, even after controlling for potential confounding factors. It further shows that high-quality carbon disclosures help investors make more balanced decisions, while lower-quality or more uncertain disclosures can amplify behavioural biases. The research also finds that experienced and sophisticated fund managers are less susceptible to these biases than their less experienced counterparts. These findings have been disseminated through academic publications and conference presentations, contributing new knowledge at the intersection of sustainable finance, behavioural finance and climate risk.

Outcome

The research provides investors, asset managers, regulators and companies with evidence that responsible investment decisions depend not only on access to sustainability information but also on how that information is interpreted. The findings highlight the importance of high-quality climate disclosures in supporting sound investment decisions and demonstrate the value of strengthening investor capability to recognise and mitigate behavioural biases. For companies, the study reinforces the benefits of transparent and credible carbon reporting as part of broader Environmental, Social, and Governance governance.

Impact

The project contributes to more effective capital allocation in support of the transition to a low-carbon economy. By identifying behavioural influences that can affect sustainable investment decisions, the research informs policy discussions on climate-related financial disclosure and investor education, and helps strengthen the integrity of sustainable finance by encouraging evidence-based investment practices that balance environmental responsibility with long-term financial outcomes. More broadly, the research supports the development of financial markets that better align with the UN Sustainable Development Goals (SDG), particularly SDG 13 (Climate Action), SDG 12 (Responsible Consumption and Production) and SDG 16 (Peace, Justice and Strong Institutions). This paper was awarded the Best Paper Prize at the 11th FIRN Annual Conference, an international peer-reviewed conference in finance.